Viaduct Par, Inc., currently sells on terms 1/10, net 30, with bad debt losses at 1% of gross sales. Of the 99% (by dollar value) of the customers who pay, 50% take the discount and pay on Day 10, while the remaining 50% pay on Day 30. The firms gross sales are currently $2,000,000 per year with cost of sales at 75% (2/3 of total cost is the variable cost component) of the gross sales amount. The firm finances its receivable with a 10% line of credit. Viaducts credit manager has proposed that credit terms be changed to 2/10, net 40. He estimates that these terms would boost sales to $2,500,000 per year. However, bad debt losses would double to 2% of the new sales level. The expected increase in sales is projected to lead to an increase capacity requirement thus cutting gross profit margin to just 18%. It is expected that 50% of the paying customers will continue to take the discount and pay on Day 10, while 50% will pay on Day 40. (Note: Use 360 days per year. The average collection period will be the weighted average of the length of days before the customer would pay. Also only consider cost of sales in obtaining investment in A/R leaving out the top-up margin in the computation for the investment cost.) What is your estimated increase in investment cost of A/R if the company shifts to the proposed credit term? Write amounts fully and not in their short form (e.g. 1,000 and not 1K)

Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit; and it keeps its central billing system there. On average, it takes 5 days from the time customers mail in payments until HGC can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 3 days. HGC receives an average of $1,400,000 in payments per day. The company would have to pay annual cost P172,500 for this system to be implemented. What is the impact on the financial aspect of the company, if they decided to proceed with the system. Write amounts fully and not in their short form (e.g. 1,000,000 and not 1M). Denote as '+' if it is an incremental benefit and '-' if it is an incremental cost.

Viaduct Par, Inc., currently sells on terms 1/10, net 30, with bad debt losses at 1% of gross sales. Of the 99% (by dollar value) of the customers who pay, 50% take the discount and pay on Day 10, while the remaining 50% pay on Day 30. The firms gross sales are currently $2,000,000 per year with cost of sales at 75% (2/3 of total cost is the variable cost component) of the gross sales amount. The firm finances its receivable with a 10% line of credit. Supposed the President wanted to change the credit policy to just net 20 days. Under these terms, sales would be expected to decrease to $1,800,000 while days sales outstanding drop to 15 days but bad debt losses would still be at 1% of the sales level. What is your estimated change in investment cost of A/R if the company shifts to the President's proposal? Write amounts fully and not in their short form (e.g. 1,000 and not 1K). Denote as '+' if it is an incremental benefit and '-' if it is an incremental cost. Viaduct Par, Inc., currently sells on terms 1/10, net 30, with bad debt losses at 1% of gross sales. Of the 99% (by dollar value) of the customers who pay, 50% take the discount and pay on Day 10, while the remaining 50% pay on Day 30. The firms gross sales are currently $2,000,000 per year with cost of sales at 75% (2/3 of total cost is the variable cost component) of the gross sales amount. The firm finances its receivable with a 10% line of credit. Viaducts credit manager has proposed that credit terms be changed to 2/10, net 40. He estimates that these terms would boost sales to $2,500,000 per year. However, bad debt losses would double to 2% of the new sales level. The expected increase in sales is projected to lead to an increase capacity requirement thus cutting gross profit margin to just 18%. It is expected that 50% of the paying customers will continue to take the discount and pay on Day 10, while 50% will pay on Day 40. (Note: Use 360 days per year. The average collection period will be the weighted average of the length of days before the customer would pay. Also only consider cost of sales in obtaining investment in A/R leaving out the top-up margin in the computation for the investment cost.) What is your estimated increase in profit if the company shifts to the proposed credit term? (Consider only product related cost and leave out A/R investment and managament related expenses.) Write amounts fully and not in their short form (e.g. 1,000 and not 1K)

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